North Carolina is Still a Title Theory State:
Countrywide Home Loans v. Reed, No. COA11-769
by Ryan Wainio, VP-Title Attorney
[email protected]
Click here for Ryan’s bio.
NCGS 39-6.6 which provides that the
If you have been paying attention, you
trustee under a deed of trust is not a
can understand why someone might
necessary party to a subordination
pause for a moment before answering
agreement. At its most
the question as to
basic, the subordination is
whether or not North “...the trustee
simply a contract for
Carolina is a title
priority, and it seems
theory state. What do named in the
proper to allow the parties
I mean by title
deed of trust
to agree without joinder of
theory? In North
the trustee who simply
Carolina, the trustee
holds
legal
title...”
holds title for the lender’s
named in a deed of
benefit. In 2009, NCGS
trust holds legal title
45-10 was amended to add subsection
to the real property granted therein as
(b) to the existing statute. This new
security for the note obligation. Once
subsection provides that, “If the name
the debt is paid off, the deed of trust is
of a trustee is omitted from an
cancelled and title reverts to the
instrument that appears on its face to
borrower. If the borrower defaults, the
be intended to be a deed of trust, the
trustee is given the power to sell the
instrument shall be deemed to be a
property pursuant to the provisions of
deed of trust, the owner or owners
the deed of trust and Ch. 45 of the
executing the deed of trust and
North Carolina General Statutes.
granting an interest in the real property
shall be deemed to be the constructive
Over the last decade or so, we have
trustee or trustees of record for the
seen a slow erosion of certain elements
secured party or parties named in the
related to title theory. In 2003, the
instrument, and a substitution of
North Carolina Legislature enacted
trustee may be undertaken under
subsection (a) of this section.” No
trustee, no problem. Finally, in 2011,
NCGS 45-10 was again amended to
add a subsection (c) which provides
that if the trustee named in the deed of
trust was the same party as the
beneficiary, the instrument shall still
(Continued on page 2)
In This Issue:
North Carolina is Still a
Title Theory State
1-3
NC Fun Facts
2
3-4
The Goal: Making New
Mechanics’ Lien
Procedures User Friendly
Role of Closing Attorney
Being Challenged
4-5
Best Escrow Practices
Series: Volume #3
6-7
Investors Trust Company: 8
Dayton v. Dayton
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North Carolina is Still a Title Theory State... continued from page 1
be deemed a deed of trust. In the same
session, Law NCGS 45-45.3 was
enacted which provides, among other
things, that a trustee does not have to
join in a release of property from the
lien of the deed of trust unless the
instrument provides otherwise and that
a trustee is not a proper party in many
civil actions involving the property.
Don’t get me wrong. As a title
insurance underwriter, all of these
changes make my life just a little
easier. My only observation is that the
passage of these statutes does seem to
be contrary to certain fundamental
characteristics of a title theory
jurisdiction, but don’t let that fool you
— title theory is alive and well in
North Carolina.
In Countrywide Home Loans v. Reed,
Margaret Smith and her daughter and
son-in-law, Judy and Troy Reed,
purchased a home. The deed named the
grantees as Margaret D. Smith and
Troy D. Reed and wife, Judy C. Reed
joint tenants with right of survivorship.
In order to purchase the home,
Margaret Smith executed a promissory
note and deed of trust to Countrywide.
Neither Troy nor Judy Reed signed the
note or deed of trust in their individual
capacities. Margaret Smith passed
away, and the loan went into default.
Countrywide filed a reformation action
against the Reeds seeking to have them
made obligors on the original deed of
trust to reflect the intent of the parties.
The Reeds counterclaimed and sought
injunctive relief. Both parties filed
summary judgment motions
alleging they were entitled judgment as
a matter of law. The trial court granted
Countrywide’s motion and declared the
following:
1. Prior to her death, Margaret Smith
owned a one-half undivided
interest in the property that was
encumbered by the deed of trust;
2. The other one-half undivided
interest was owned by Troy and
Judy Reed as Tenants by the
Entireties; it was not encumbered;
3. Upon death, Margaret Smith’s
interest vested in Troy and Judy
Reed, subject to the deed of trust,
pursuant to the right of
survivorship;
4. Troy and Judy Reed own the
property in fee simple absolute;
subject to the deed of trust on the
one-half undivided interest.
The Reeds appealed the order granting
summary judgment for Countrywide
contending that the deed of trust “did
not survive Mrs. Smith’s death.” On
appeal, the Court found that it “must
determine whether the deed of trust
severed the joint tenancy, such that
only a portion of the property owned
… was encumbered, or whether the
deed of trust did not sever the joint
tenancy …”
The Court found that NC is a title
theory state and that the conveyance of
the legal title to the land as security for
the debt triggered the provisions of
NCGS 41-2(a). NCGS 41-2(a) states
that “Upon conveyance to a third party
by less than all of three or more joint
tenants holding property in joint
tenancy with right of survivorship, a
tenancy in common is created among
the third party and the remaining joint
tenants...” Therefore, the act of
mortgaging the property severed the
joint tenancy, and Mrs. Smith became
a tenant in common with the Reeds. (It
doesn’t really make a difference to the
analysis, but I would argue that, since
you only had two parties to the deed as
the tenancy by the entirety, it should be
considered a single party as opposed to
(Continued on page 3)
The Museum of the Alphabet is a museum located in Waxhaw,
NC. This museum exhibits all of the world’s alphabets.
Alphabetical and language exhibits include: ancient Egypt (stamp
your name in Hieroglyphics!), Rome, Greece, Turkey, Russia,
Mongolia, China, Japan, Korea, the Arabic world and its
derivatives, the Cherokee language and others.1 To learn more,
visit the museum’s website at:
www.jaars.org/museum/alphabet/index.htm
1
Photo: http://www.jaars.org/museum/alphabet/index.htm
http://www.roadsideamerica.com/tip/6200
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North Carolina is Still a Title Theory State... continued from page 2
two separate parties.) As a result, the
Court found the trial court to be correct
in finding that the deed of trust did not
constitute a lien on the one-half interest
owned by the Reeds as tenants by the
entirety but held the trial court
incorrect in concluding that upon
Margaret Smith’s death the Reeds
owned the property in fee simple
absolute.
the joint tenancy. The property will
pass through the estate of the deceased
party. Obviously this could lead to a
dispute among family members and
subject the property to claims against
the deceased’s estate. These issues
would not have arisen if the property
had been held as joint tenants with
right of survivorship at the time of
death.
Unintended Consequences of the
Mortgage
The Countrywide case does have a
very specific set of facts. Less than all
of the joint tenants conveyed their interest to the trustee under the Deed of
Trust. Surely, the lender intended to
have 100 percent of the interest as
security for the loan. The case does not
address whether the result would be the
same in the event all joint tenants
joined in the conveyance to the trustee.
NCGS 41-2 only talks about severance
when less than all of the joint tenants
convey their interest. That certainly
makes perfect sense when the property
is transferred or conveyed to a third
party in the normal sense, but a
mortgage is a unique situation. The
What does all this mean for the title
examiner? If you are reviewing a title
where the property is held as joint
tenants with right of survivorship, you
have to look to see if the property was
mortgaged and by whom. In the
unlikely event the property was
mortgaged by less than all of the joint
tenants, the property will not pass to
the remaining joint tenants by
survivorship. It makes no difference
that the trustee did not seek to enforce
the mortgage. The act of conveying the
title to the trustee is enough to sever
interest is conveyed, but the right of
redemption is retained. In addition, the
Court of Appeals, in their opinion, did
state the following: “In this case, North
Carolina is a title theory state, and thus
a mortgage is a conveyance. Mrs.
Smith severed the joint tenancy when
she, as the sole obligor on the deed of
trust, filed the deed of trust
encumbering the property.” This
language of the opinion can be viewed
as either a simple restatement of the
facts or could potentially stand for the
proposition that if all joint tenants had
conveyed their interest the joint
tenancy would not have been severed
by the conveyance to the trustee. I
don’t know how the Court would
ultimately decide that issue. As always,
I would encourage you to consult with
your title insurer in the event you are
reviewing a title where joint tenants
with right of survivorship have
mortgaged the property, and one of
them has now passed away.
The Goal: Making New Mechanics’ Lien Procedures User-Friendly
by Steve Brown, VP-Title Attorney
[email protected]
Click here for Steve’s bio.
Since the new mechanics’ lien law was ratified in July
2012, many attorneys have expressed concerns about
whether the effect of the new law will place any “additional
burdens” on closing attorneys and their staffs. As most of
you are aware, the new law (which can be found at the link
set forth at the end of this article) is scheduled to go into
effect on April 1, 2013. Accordingly, there is a relatively
short time for everyone to learn the substance of the new
law and to adjust to new procedures required by the new
law.
Since the passage of the law this summer, title insurance
companies have been working cooperatively through the
North Carolina Land Title Association (NCLTA) to digest
the new law, develop educational programs to meet the
needs of attorneys and their staffs, and develop relatively
uniform “user-friendly” forms and procedures. (Each title
company will still have to develop their own underwriting
guidelines.) As a result of these efforts, a CLE program has
been developed for use by all of the title companies to assist
attorneys in the first step of the educational process -- to
learn the substantive provisions of the new law and the effect
that it will have on the closing process. Investors Title will
be presenting this program at its Fall Gathering Seminar.
In addition, NCLTA forms are being developed. The
NCLTA is working with the Real Property Section of the
NCBA and the Realtors Association to make changes in the
(Continued on page 4)
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The Goal… continued from page 3
Offer to Purchase and Contract
which intend to make it
easier for attorneys to learn
who the Mechanics’ Lien
Agent is on a given property.
Finally, title companies are
working to develop a central
registry for lien agents to make
the whole lien agent process as
“user-friendly” for attorneys,
lenders, builders, suppliers, and
trade contractors as possible.
with respect to the processes and forms which will facilitate
implementation of the new law. Investors Title is already
planning a series of seminars for attorneys and paralegals in
the Winter and Spring of 2013 across the state to insure that
everyone is ready when the new law goes into effect.
Throughout, the goal of all these preparations is to make the
new procedures “user-friendly” for all parties who will
utilize the procedures.
http://www.ncga.state.nc.us/Sessions/2011/Bills/Senate/PDF/S42v6.pdf
As these efforts progress, more education will be offered
Role of NC Closing Attorney Being Challenged
Did you know that your role as a closing attorney in North Carolina is
being challenged by the Consumer Financial Protection Bureau?




Did you know the HUD-1 settlement statement is being replaced by the
“Closing Disclosure?”
Do you believe that providing the settlement statement/closing disclosure
is the role of the lender?
Do you want to be questioned about errors in a settlement statement
closing disclosure that you did not prepare or provide to the borrower?
Do you want to provide all the information needed to complete the closing
disclosure to the lender to provide to the borrower?
If you answered “no” to any of these questions, then you have until November 6th to have your voice heard!
On July 9th, The Consumer Financial Protection Bureau (CFPB) published the Integrated Mortgage Disclosure Rule that will
combine the final TILA disclosure and HUD-1 Settlement Statement into a single document called the “Closing Disclosure.”
Elements of the proposed rule will have a direct impact on attorneys closing loans in North Carolina.
Under the proposed rule, the lender, not the settlement agent/closing attorney, will provide the new Closing Disclosure. The
CFPB is considering an alternative that would allow a settlement agent/closing attorney to provide the new Closing
Disclosure. They need to hear from you concerning this alternative.
The proposed rules require the new Closing Disclosure and all related documents to be maintained in electronic machine readable format (XML). Do you know how to produce an XML document? How would this impact you? How would you comply
with the requirement? What would it cost you to comply?
Closing software will require significant upgrades or replacement to accommodate the new disclosures, staff will require
training, and internal documents will require reprogramming. Is your software maintenance agreement up to date? Does it
cover future upgrades or replacements? If not, what will it cost you? How much will it cost you to train your staff?
The consumer must receive the new Closing Disclosure 3 days prior to closing. If changes to the new Closing Disclosure are
required, the closing will be delayed. What will your clients expect from you? Will you have to have a “pre-closing” to
answer consumer questions? How will this impact your staffing, scheduling, and volume?
(Continued on page 5)
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Role of Closing Attorney Being Challenged cont. from page 4
To learn more specifics on these and other important issues in the proposed rules, please see the attached summary of key
provisions of the rules.
What should you do? Express your concerns by November 6th!
Your voice counts — the comment period ends on November 6, 2012. Talk to your colleagues and get the word out. Submit
comments to the Consumer Financial Protection Bureau to influence the way these rules will impact your practice, and
ultimately, your clients. Comments that are concise, personal, understandable, and factual will have more impact with the
CFPB. Include data on both the implementation costs and operational costs to your practice that may result in higher closing
costs to your clients. Consider telling a story based on a real life scenario and express your opinion on how these proposed
rules may negatively impact your client. Explain what you would like to see in the new rules, but be specific.
When should you comment? Now! Where do I submit comments? Link Below!
The comment period for the proposed rules closes on November 6th, 2012, so don’t wait to make your opinion heard.
Comments can be submitted at http://www.regulations.gov/#!submitComment;D=CFPB-2012-0028-0353.
To get you started, we have supplied you with a draft comment letter which was prepared by ALTA. To avoid the appearance
of a form letter, personalize this letter by adding your opinions and suggestions and submit it to the CFPB on your firm’s
letterhead.
Tips for creating your comments:
 Tell your story, as a North Carolina attorney, and explain what you have seen happen at the closing table.
 Be specific and use examples to support the role of the North Carolina attorney at a closing.
 Think about the types of questions clients might ask you with the new forms.
 Be concise – but express your concerns fully.
 Remember the CFPB is concerned with consumer protection, and attorneys are in the consumer
protection business.
 Remember that since there are very few approved attorney states, you need to speak up about the
importance of an attorney at the closing table.
 Your opinion matters – Don’t be afraid to say what you think.
The proposed rule can be found at https://federalregister.gov/a/2012-17663. For more information on the proposed rules, and
to see the new disclosure forms, visit the CFPB’s website at http://www.consumerfinance.gov/knowbeforeyouowe/.
Timeline for Implementation of Proposed Rules
Integrated Mortgage Disclosure Rules
Comment period ends November 6, 2012.
Final rules are expected early 2nd quarter 2013.
Implementation date is anticipated to be 12-18 months after final rules.
Investors Title Insurance Company has dedicated significant resources to understanding the issues facing the approved
attorneys in North Carolina and is working diligently to help mitigate the impact on the approved attorney system. We believe
working with our approved attorneys is vital to navigate through these regulatory changes.
In the coming days, weeks, and months, we will be:
 Providing detailed information on the substantive issues surrounding this topic.
 Working with you and other interested parties to develop practical solutions.
 Advocating to maintain and advance the interests of the approved attorney
system in NC.
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Best Escrow Practices Series
Volume 3: Wires, ACH Transactions, and Positive Pay
By Holly Simmons, Esq.
In this series, we are focusing on guidelines to maintain a secure and clean escrow account. In Volume #1 of this series, we
reviewed the concepts of controls and segregation of duties. Volume #2 covered best practices for checks and receipts.
If you haven’t established online banking for wires and escrow account, there’s more room for error when transmitting wire
requests via fax. It’s not uncommon for a closing attorney to fax a payoff request and later realize (often 30 or more days)
that the faxed wire request was never transmitted to the bank. The closing attorney then becomes responsible for any
additional interest accrued as a result of the delayed payment.
Wires
The following are recommended best practices for initiating and transmitting wires:
1. Use Dual or Triple Controls. This is the golden rule of wire transmission. Dual control means that
one individual or group of individuals initiates a wire and a second person or group of persons
approves/releases the wire. The majority of reported wire fraud cases are from settlement agents that
did not have dual controls.
2. Establish Wire Limits. Wire limits can be established with your banking administrator and be adjusted as needed by
the proper authority. The wire limits should be set based on your amount of E&O coverage and the type of escrow
transactions you service.
3. Use Security Tokens. Use tokens for all online transactions to provide an additional layer of authentication. Many
banks now offer security tokens for online business accounts. The tokens will change codes every 30 to 60 seconds, and
the user inputs the code displayed on the token.
4. Transmit wires from standalone computer. If you use online banking, all of your banking should be done from a
standalone computer that is not tied to your network or email system. It should also have the latest spyware and virus
protection programs.
5. Use Strong Passwords. Create a password for your online banking with at least 10 characters that includes a
combination of characters, numbers and mixed case letters. You should also never store your password in a place that
is visible or easily accessed by others.
6. Helpful Hints:
a) Deposit slips may have a transcode included in the account number...best not to
use them. After confirming the routing number, use a cancelled check if wiring
to a customer’s checking account.
b) When originating wires online, use abbreviations where possible. For example
use “ESC” instead of ESCROW. If the wire is too long, the receiving bank will
need to abbreviate and may charge additional fees.
ACH Transactions
The Automated Clearing House (ACH) is an electronic network for financial transactions. ACH FUNDS ARE NOT THE
SAME AS WIRED FUNDS. There is a distinction between "wired funds," which are generally available funds under state
title insurance requirements, and ACH transfers, which may not be. They are both electronic transfers of funds, but they are
distinctly different. Wired funds are managed by the Federal Reserve System. ACH transactions are governed by rules
(Continued on page 7)
P6
Best Escrow Practices Series continued from page 6
Volume 3: Wires, ACH Transactions, and Positive Pay
By Holly Simmons, Esq.
established by NACHA (National Automated Clearing house), a private financial industry trade association. Different
NACHA Operating Rules apply to consumer ACH and business ACH transactions.
1. First, they may be subject to unilateral recall by the Payor for a period of time after
deposit into an account.
2. Second, they may be used to make unauthorized withdrawals from an account. The
only things a person needs to attempt an ACH transfer out of your escrow or
operating account are your account number and the bank routing number.
Best Practices for ACH
 Have your bank or banking administrator block all ACH transactions from your main
operating escrow account.
 If you need to facilitate ACH transactions, set up a separate account to receive and
transmit funds via ACH.
Positive Pay
Bank Positive Pay assists in creating, transmitting, and researching the check records that you send to the bank. The
software is installed at your location and works in conjunction with your accounting package. It protects against check fraud
for altered and counterfeit checks.
Here’s how it works:
 ABC Firm issues approximately 50 checks each Friday. After the checks are cut, ABC
Firm transmits to their bank, a list of the checks that they issued (check number and
dollar amount). This list is imported into the Bank's computer.
 Later, when the checks are presented to the Bank for payment, the Bank matches each
check presented against ABC's previously transmitted lists. If the presented checks'
numbers and amounts appear on a previously submitted list, the check is sent through
for payment. If both items do not match, the check is not cleared and ABC Firm is
alerted.
If you’re using the Investor’s Title’s iTracs service, you will automatically receive positive pay for each day’s transmission.
Additional Disbursement Controls
1. Never disburse until you have a zero balance and never force balance a ledger.
2. Ask your software provider how to use key security features. Most require a separate
Administrator tool.
3. Have all disbursement instructions in writing, especially for seller or borrower proceeds.
P7
New On-Demand CLE/CPE Course Available!!!
What are We Gonna to Do with Mama’s Property?
Course Title: What are We Gonna Do with Mama’s Property?
Course Available: Now!
Course Content: Title attorneys regularly receive questions regarding the handling of
transferring properties held by trusts or being administered in estates. Learn the “ins and
outs” of the legal and practical requirements for those transactions and what the title
company will need to know and see in order to insure those transactions.
Credit Available: CLE and CPE
Cost: $25
Click here to access On-Demand content.
Personalized service and
individualized attention,
delivered the old fashioned
way.
Dayton v. Dayton
In an unusual case, the North
Carolina Court of Appeals has
upheld a trial court’s ruling that the
missing owner of a life insurance
policy died as a result of an
accident, thereby doubling the
benefits payable under the policy.
The case developed when Kathy
Dayton filed suit in January 2010
seeking to have her son Douglas
declared dead. Douglas had not
communicated with anyone since
June 2004, and his mother sought a
court order declaring him dead so
she could collect the proceeds from
his life insurance policy as his sole,
intestate beneficiary. The policy
provided $50,000 of basic
coverage, but that coverage doubled
if Douglas died because of an
accident. The trial court issued an
order in December 2010 declaring
an “‘accidental death,’” and
ordering Baltimore Insurance
Company to pay Dayton $100,000.
The trial court later affirmed its
decision in an order issued in April
2011. The insurance company
appealed arguing, inter alia, that
there was no proof that Douglas had
died by accident. The appellate
court affirmed on procedural
grounds. In essence, the Court said,
there were several court orders
issued in this matter, but the first
order of the trial court, decided in
December 2010, was a final
judgment—it was not an
interlocutory decision under N.C.
Gen. Stat. Section 28C-11(a)—and
the company had 10 days under
state law to make a motion to
amend the court’s decision. When
the company failed to make such a
motion, the appellate court
concluded, it waived its ability to
challenge the outcome.
--Dayton v. Dayton, No. COA11-1216,
N.C. Ct. App. 5/15/12
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This article is for informational purposes only
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P8